As we approach 2021, we believe investors should look through near-term economic weakness caused by a rise in COVID-19 infections and focus on CS economists’ forecast for 4%+ global GDP growth in 2021 driven by US fiscal stimulus and the likelihood of a vaccine. We think the dollar will resume its decline and inflation expectations will rise. 

GEM: add to overweight hedged and unhedged. GEM currencies are close to 20-year lows versus the dollar despite the basic balance of payments  urplus being at an 18-year high and a near-record real yield pick-up over the US. When GEM currencies appreciate, GEM equities tend to outperform. The sector-adjusted PE is close to a 15-year low. The region is the clear beneficiary from a combination of a weaker dollar, a fall in TIPS yields and a rise in inflation expectations. On a market cap basis, GEM  overnments appear to have the best control of infection rates. We have a strong overweight of China and Korea, add to India, and keep Brazil at overweight. 

UK: overweight unhedged, benchmark local currency. UK valuations are at 30-year lows, with our models showing UK equities to be the cheapest of any region by far. All major sectors have underperformed their  nternational peers, suggesting a Brexit discount, while our central case is a Brexit deal. There is capitulation on sterling and UK equities. We have a preference for domestic UK exposure (e.g. homebuilders, National Grid) and those names that are  nusually cheap versus their peer group (e.g. Unilever).

Japan: benchmark. Historically, Japan has been the worst performing region when the dollar weakens, the TIPS yield falls or oil prices rise. That said, we would not move to underweight given: cheap valuation, clear-cut signs of corporate change, and an interesting funds flow dynamic (BoJ buying of equity and buybacks can run at 5.4% of market cap) at a time when foreign investors have been more on the sidelines than usual. 

Europe: benchmark. Our concerns are: i) the rise in infections is leading to more lockdowns than in other regions (as reflected in the PMI and Google Mobility data); ii) the European Recovery Fund will not be up and running until H2 2021 and it is hard to envision a large-scale incremental policy response from here; and iii) a strong euro. We avoid an underweight because: i) renewed furlough schemes should ensure that the recovery is paused for only a quarter; ii) there have been major moves to limit the euro break-up risk (German fiscal spending, the ECB being more aggressive YTD than the Fed, as well as the Recovery Fund) yet Europe trades on a 10% sector-adjusted P/E discount to the US; iii) Europe is very underweight tech and benefits from tech headwinds. We remain overweight Germany and Sweden.

US: underweight. US equities tend to underperform when GDP growth is above trend, which is set to be the case in 2021. A ‘clean sweep’ scenario for the Democrats could lead to non- US markets outperforming. We estimate that Biden’s policy proposals, if fully implemented, could take a net 10% off US EPS (see US election outlook, 2 Oct) while stronger growth would be a clear positive for non-US equities. The US has benefitted more from leverage than any other region, but the cost of corporate debt is now at its historical lows. A weaker dollar leads the US to underperform (unhedged). Near term, we note a sharp deterioration in relative tech earnings revisions at a time of higher regulatory and tax scrutiny (US and tech performance are closely correlated). We recently lowered our tech overweight